subject: Investment Strategies Using A Contrarian Attitude [print this page] I recently read an article in the Wall Street Journal about an investor that recently made a killing with his investment strategy. When the stock market had its enormous downturn in May, 2010, he immediately bought up blue-chip stocks. When the stock market then turned around, even if it was just for a moment, he was able to sell his stock for a nice profit. This is what is known as taking the contrarian viewpoint.
If you do want to invest in blue chip stocks, then how do you determine which stocks to invest in? What parameters do you use to determine a good stock that has value. Many investors will use a discount off of net asset value (NAV), or a low p/e ratio, or a low price to free cash flow ratio. This last one seem like the best one to use since it is less likely to be manipulated.
Contrarians are not necessarily bullish or bearish. They are simply wise investors who choose to do the opposite of what the crowd is doing. Humphrey Neil in The Art of Contrarian Thinking said "When everyone thinks alike, everyone is likely to be wrong".
If you are a contrarian, then you have the attitude that you are going to buy sell rated stocks. You are looking for strong companies who the analysts do not currently like. You are looking for those stocks which have a large short ratio. Of course, you do not throw your money away at worthless stocks. We all know that there are plenty of these. What you are looking for are the stocks that are temporarily out of favor. They have had some rumor or innuendo that has caused them to be knocked down. You realize that they have strong fundamentals and will in a short term come back.
Bruce Stout, Murray Income Trust manager, states "Never pay up for anything, even if it is the best quality asset in the world." He will often identify growing companies and may wait for years to buy them cheaply.
When looking for good, strong stocks to invest in, then you should definitely stay away from penny stocks. These stocks are never a good investment. You should also look for stocks that have a strong institutional interest. Institutions have the management tools to look beyond the immediate short-term news. They are aware of the good companies and invest in them. It is in their best interest to do this since that is how the managers get paid.
Another rule of thumb is to look at what the insiders are doing. If they are buying then it is probably a good idea for you to buy also. If they are selling, then you can guess they may know something is coming down the pike.
It would be my suggestion that if you find that everyone is selling, then that is probably the time to buy. Warren Buffet is a well known contrarian. It is his belief that the best time to invest in a stock is when the shortsightedness of investors have beaten down the price.
There are no actual trick to stock market investing. Many websites may state that they have the solution to making money with stock market investing. However, it just comes down to what Warren Buffet said "Rule No. 1: Never lose money. Rule No. 2: never forget rule number 1. Making good solid investments with quality companies will help you to live by those rules.
